Nov 8 - Net asset values (NAVs) for New Jersey, New York, and Connecticut
single-state closed end-funds (CEFs) have remained stable in the wake of
Hurricane Sandy. Fitch's latest analysis also indicates that New Jersey,
New York, and Connecticut single-state funds' preferred shareholders continue to
benefit from healthy asset coverage cushions as a protection against the
possibility of any near-term price volatility associated with the storm.
Our analysis of the six-day trading period from Oct. 29 to Nov. 6 for the 26
outstanding Fitch-rated New Jersey, New York, and Connecticut single-state CEFs
indicates that fund NAVs actually increased in most instances (four were
unchanged), even as the effects of the storm damage became clearer in the days
that followed. Asset coverage ratios relating to preferred shares and debt for
the funds remain strong, reflecting the stable NAV performance. On average,
Fitch-rated New Jersey, New York, and Connecticut single-state funds enjoyed
coverage cushions, at last review, of more than 37% at the 'AAA' rating
Fitch measures asset coverage available to the rated securities (preferred
shares) based on the discounted market price loss expectations, the
diversification of the funds' assets, and the use of structural and economic
leverage. In case of asset coverage declines, each of the funds' operating
documents requires the funds to reduce leverage in a sufficient amount to
restore compliance with the applicable asset coverage tests within a specified
Our CEF criteria consider the inherent concentration risks presented by
single-state CEFs, which typically invest 75%-100% of assets in a single state.
For single-state concentrations above 25%, we apply higher discount factors for
securities of issuers located in a single state. This is intended to capture the
increased likelihood of price volatility and correlation between portfolio
assets from a single state under credit stress, which may be exacerbated by tail
events, headline risk, and/or forced selling.
Fitch will continue to monitor NAV volatility and the possibility of asset
coverage erosion associated with New Jersey, New York, and Connecticut
single-state CEFs in the coming weeks.
For additional information on this topic, please see our report, "Rating
Closed-End Fund Debt and Preferred Stock," available at www.fitchratings.com.